The term ‘circulating supply’ refers to the number of tokens currently circulating on the market that market participants can own and trade. It is an essential metric investors use to compare the valuations of different tokens.
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Projects don’t usually have a constant circulating supply of their tokens. Instead, token supply increases and decreases regularly. For example, protocols like Bitcoin (BTC) create and add tokens to their circulation through mining. In the case of centralized tokens, project developers can increase supply through instantaneous mining.
A portion of tokens also go out of circulation unintentionally as some people send them to unused addresses, or lose their wallet access. Therefore, the circulating supply of a token is never an exact number but the best approximation – for example, it is approximated that around 20% of all BTC has been permanently lost.
Some projects can also control their tokens’ circulating supply at will. For example, suppose project X has an initial plan to mine 100 billion tokens. In this case, it can release only half its tokens upon launch. There will still be 50 billion tokens on hold, which the project can gradually release into circulation over time, according to their Tokenomics plan and intended goals.
Using circulating supply to calculate market cap
Due to the openness and transparency of blockchain-based protocols, all the information needed to calculate their market capitalization (market cap) is publicly available. You need only a token’s current market price and circulating supply for this calculation. For instance, if a project has a circulating supply of 1 million tokens whose current price is 7 USD per token, its market cap would be 7 million USD (circulating supply x token price).